Fed on track for rate hike this year: Yellen

Dr Janet Yellen after her speech in Massachusetts on Thursday. She was speaking a week after the Fed kept interest rates near zero, citing global developments that might dampen growth and inflation in the US.
Dr Janet Yellen after her speech in Massachusetts on Thursday. She was speaking a week after the Fed kept interest rates near zero, citing global developments that might dampen growth and inflation in the US.PHOTO: REUTERS

But economic 'surprises' could lead to change in plan: US central banker

WASHINGTON • Federal Reserve Chair Janet Yellen said the United States central bank is on track to raise interest rates this year, even as she acknowledged that economic "surprises" could lead them to change that plan.

"Most FOMC (Federal Open Market Committee) participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter," Dr Yellen said during a speech on Thursday in Massachusetts. "But if the economy surprises us, our judgments about appropriate monetary policy will change."

She was speaking a week after the FOMC left its benchmark federal funds target near zero, saying "recent global economic and financial developments" might dampen growth and inflation in the US.

Her remarks echoed recent comments by other Fed officials who have sought to frame the outcome of this month's meeting of the committee as a pause in the march towards higher rates, rather than a signal that the Fed's intentions have changed.

The committee next meets from Oct 27 to 28, and then again from Dec 15 to 16.

Concerns over a slowdown in China after a surprise Aug 11 devaluation of the yuan triggered turmoil in financial markets and raised questions about the outlook for the global economy.

While "there wasn't anything significant enough that changed in one week for her to give us a different take", said Mr Tom Porcelli, chief US economist at RBC Capital Markets in New York, Dr Yellen "finally acknowledges that she, specifically, does believe that a rate hike is appropriate this year".

Mr Porcelli expects a December increase, but thinks there's a high hurdle to moving this year. Slower demand from China, where growth is projected to drop below 7 per cent this year, has helped push down commodity prices, sapping already low inflation in the US.

The Fed has also been forced to weigh headwinds against signs of continued growth in the domestic economy. US employers have added 1.7 million jobs to payrolls this year, pushing unemployment down to 5.1 per cent last month, its lowest in more than seven years.

The US dollar rallied after Dr Yellen's remarks, dragging the Singapore dollar to $1.4239 against the US dollar yesterday. It had closed at $1.4216 the previous day.

The ringgit declined beyond RM4.39 against the greenback yesterday for the first time since the Asian financial crisis prompted Malaysia's central bank to implement capital controls in 1998.

Dr Yellen's remarks were "significant in that it does indicate they're going to move forward and raise rates this year", said Ms Kathy Lien, managing director at BK Asset Management.

"She made a pretty strong argument that rates are going to rise this year."

BLOOMBERG, AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on September 26, 2015, with the headline 'Fed on track for rate hike this year: Yellen'. Print Edition | Subscribe